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The conservative American Action Forum and its director, Douglas Holtz-Eakin, assert that the Supreme Court’s limitation on the health reform law’s Medicaid expansion will add “hundreds of billions” to the law’s cost. In reality, the limitation is likely to either leave federal costs roughly unchanged or to reduce them, though it could leave many people without affordable coverage.

[The] Supreme Court decision essentially means that states can decide whether or not to expand their Medicaid programs to cover low-income adults. The typical (or median) state only covers working parents who make less than 63 percent of the poverty line ($12,790 a year for a family of three) and non-working parents with incomes below 37 percent of the poverty line ($7,063 a year). Only a handful of states provide coverage to any low-income adults without dependent children, regardless of how far below the poverty line they fall. The Medicaid expansion in the Affordable Care Act would cover these poor and low-income adults by expanding Medicaid to 133 percent of the poverty line ($25,390 for a family of three).

If all states opt to go ahead with the Medicaid expansion, of course, there will be no change in costs. But if some states decide not to implement the expansion, now that it is effectively optional — even though it is a very good financial deal for states — there will be two quite different effects on federal spending.

People with incomes between 100 percent and 133 percent of the poverty level, who would have become eligible for Medicaid if their state had implemented the Medicaid expansion, will instead become eligible for federal tax credits to help them buy private coverage in the health insurance exchanges.

On the one hand, that coverage will be somewhat more costly than Medicaid; on the other hand, people will have to pay modest premiums for their coverage, unlike in Medicaid. Some people who would have enrolled in Medicaid will decide not to buy private coverage, which will reduce federal costs. Congressional Budget Office estimates provided during the development of the Affordable Care Act indicate that, on balance, the federal government’s spending for people in this income range is likely to increase modestly.

For people with incomes below the poverty line, however, the story is very different. They would have become eligible for Medicaid if their state had implemented the Medicaid expansion, but not if the state declines the expansion. They won’t qualify for federal tax credits, either, because the income threshold is the poverty line. This result would be very unfortunate — many working-poor families and individuals would end up uninsured — but it would significantly reduce federal Medicaid costs.

The second effect is almost certain to dominate the first, meaning that the net impact will likely be a reduction in federal costs.

There are two reasons why. First, there are many more uninsured people who are below the poverty line than are between 100 percent and 133 percent of the poverty line. Put another way, the people who are likely to cost the federal government less money than expected outnumber the people who are likely to cost it more money than expected.

Second, on a per-person basis, the federal savings from not providing Medicaid coverage to people below the poverty line who don’t qualify for Medicaid because their state didn’t implement the expansion are much greater than the modest increase in federal costs from providing tax credits rather than Medicaid coverage to people above the poverty line.

In short, the federal government’s spending will very likely fall somewhat if some states unwisely decide not to implement the Medicaid expansion as a result of the Supreme Court’s decision. The American Action Forum’s assertion that federal costs would rise substantially is entirely unfounded.